When determining if there is coverage for a claim, the first document attorneys, homeowners, and adjusters will look at is the policy. We often instruct adjusters or homeowners to request a certified copy of the policy to make sure that we have a complete, accurate copy. In that regard, it is often presumed that if you are provided with a “Certified Copy” it is accurate and the policy in place at the time of the loss.

Recently, I was reviewing a policy and was intrigued to find the above stamp on the policy. Rather than certifying that a true and correct copy of the policy was attached, the stamp provided a slightly different attestation: true and certified “to the best of our knowledge.” A slight, but probably more accurate statement of what a certified copy of an insurance policy actually is.

Most times a certification is performed by someone in the underwriting department who is merely signing an attestation page that the policy is true and accurate. What amount of research goes into determining whether the certified policy is accurate is usually unknown by the policyholder. After all, the certification does not discuss the steps the underwriter went through to determine its accuracy. Even if the underwriting department spent to time to review and certify the policy’s contents, there is not guarantee the “certified copy” is the policy issued to the insured. Rather, it is more accurately, true and certified “to the best of our knowledge.”

Therefore, even if you receive a “Certified Copy” of the policy it is still a good practice to take the time to review the applicable declarations and/or forms schedule and compare it to the policy pages you are provided. Match up each of the policy forms to the declarations/form schedule to confirm that you do in fact have a complete and accurate copy of the policy—at least to the best of your knowledge.

In Wilcox v. State Farm Fire and Casualty Company,2 the Minnesota Supreme Court recently ruled that in the absence of specific language in a policy identifying a method of calculating actual cash value (“ACV”), the trier of fact must determine whether depreciation of embedded labor components “logically tend[ed] to the formation of a correct estimate of the loss.”

The Wilcoxes property was damaged by hail and they filed a claim against their insurer, State Farm Fire and Casualty Company (“State Farm”). State Farm provided the Wilcoxes with an estimate of the ACV of the damaged property. In the estimate, State Farm calculated the replacement costs of individual items (i.e. roof flashing, siding, fascia, gutters, and window screens). Then, State Farm subtracted the pre-loss depreciation of some, but not all, individual items. For example, State Farm depreciated the cost of removing and replacing certain materials, such as siding. State Farm, however, did not depreciate the cost of the new siding separately from the cost of the labor required to install the new siding on the home (the “embedded labor costs”). Rather, State Farm calculated the removal and replacement of the siding as a single cost, then depreciated the removal-and-replacement cost as a whole. The court referred to the cost of labor to repair or replace the damaged property as “embedded labor costs.”

The Wilcoxes alleged that State Farm breached the terms of their homeowners policy when calculating the ACV of the damaged property. Their policy did not define ACV or how it was to be calculated. The Wilcoxes argued that State Farm could not depreciate labor costs embedded in the cost of repairing or replacing damaged property.

The district court certified the following question to the Minnesota Supreme Court:

May an insurer, in determining the “actual cash value” of a covered loss under an indemnity insurance policy, depreciate the costs of labor when the term “actual cash value” is not defined in the policy?

The Minnesota Supreme Court reformulated the question as follows:

When a homeowner’s insurance policy does not define the term “actual cash value,” may the trier of fact consider labor-cost depreciation in determining the “actual cash value” of a covered loss when the estimated cost to repair or replace the damaged property includes both materials and embedded labor components?

I look at insurance policies day in and day out—it’s just a part of my job. Every now and then, I come across something that makes my head spin or causes me to do a double take.

Readers of this blog have seen some of my posts where I implore homeowners to read their homeowner insurance policies and ask questions if there are terms or provisions they don’t understand. Well, most homeowners purchase policies for protection in case of fire and theft. Although water losses are the most common type of loss that result in claims, most homeowners are unaware that not all water losses are covered. That said, it is standard that a “sudden and accidental” escape of water from a plumbing system causing physical damage is covered. However, take a look at this water exclusion from this policy and also the definition of “water damage”:

If you are reading it as I am, here, even a “sudden and accidental” water loss under this policy is not covered! So, a homeowner with this policy cannot be compensated if a water line under the kitchen sink bursts and sprays water everywhere; or, if a hose to the washing machine suddenly breaks during a cycle and floods the house. Although homeowners as consumers can make their own decisions who insures their home or how much coverage they want, I believe that if a homeowner was made aware of an exclusion as expansive as the one above, he would really have to think hard about whether to accept that risk.

As always, educating the policyholder is vitally important and as a firm, through this blog, we try to make as much information available and share our knowledge.

The title of this blog is a quote by Chip Merlin after we discussed some of the issues that have been popping up in my continued review of the Farmers “Next Gen” policy. During this review, I realized this policy is really the gift that keeps on giving—that is, if you are the carrier. Hidden throughout the policy are changes, some major, some more subtle, that make the policy extremely carrier friendly and, in my opinion, anti-consumer in order to pay less on claims.

One such change is the below clause that deals with the payment of overhead and profit:

e. General contractor fees and charges will only be included in the estimated reasonable replacement costs if it is reasonably likely that the services of a general contractor will be required to manage, supervise and coordinate the repairs. However, actual cash value settlements will not include estimated general contractor fees or charges for general contractor’s services unless and until you actually incur and pay such fees and charges, unless the law of your state requires that such fees and charges be paid with the actual cash value settlement.

I see two major issues with this clause. First, and perhaps most obvious, is the language that makes the decision to pay overhead and profit subjective. While the traditional view is that overhead and profit will be paid if three or more trades are involved in the repair, this policy states that overhead and profit will only be paid “if it is reasonably likely that the services of a general contractor will be required to manage, supervise and coordinate the repairs” (emphasis added). The insurance carrier will be the one to determine if a general contractor is necessary regardless of the number of trades or complexity of the work to be performed. I can only imagine the fights this will cause.

The second major problem with this clause: overhead and profit is only paid once incurred by the insured. Making overhead and profit an incurred coverage item can put a huge burden on an insured that may not have the means to front the expense. Imagine a homeowner has a fire that destroys their home. The replacement cost of the home is $200,000 and after overhead and profit is added the total rebuild cost is then $240,000. However, the home is older and the insurance carrier depreciates the home by $50,000 making an actual cash value payment of $150,000. In that instance, Farmers would write a check for $150,000 for a $240,000 loss. The insured can’t make a claim for the recoverable depreciation or overhead and profit until those costs are incurred. The insured would have to front $90,000 to secure full indemnification under the policy.

Finally, it should be noted that the policy form this clause was taken from is the one used by Farmers in Pennsylvania. I wonder why this provision is even in the policy as it states that overhead and profit will only be paid when incurred, “unless the law of your state requires that such fees and charges be paid with the actual cash value settlement.” As my learned colleague, Larry Bache, wrote in October, 2012, Pennsylvania law requires overhead and profit to be paid as part of the actual cash value payment. However, after conversations with some folks working claims in Pennsylvania, that does not seem to be how the claims are being administered.

Where an insurance policy requires parties’ appraisers to be “disinterested,” do you think their attorney can serve as their appraiser? Not according to a recent opinion from Florida’s Fifth District Court of Appeal.1

Florida Insurance Guaranty Association (“FIGA”) appealed a trial court order compelling appraisal for the policyholders in a dispute over damages in a sinkhole loss. The case on appeal involved, in part, whether the policyholders selected an appraiser that could serve as their appraiser. The trial court had ordered the claim to appraisal and allowed the policyholders to have their attorney act as their appraiser.

In a short opinion, the appellate court essentially said the claim can proceed to appraisal, but the policyholders cannot have their attorney act as their appraiser.

The Court held that:

Given the duty of loyalty owed by an attorney to a client, we conclude that attorneys may not serve as their clients’ arbitrators or appraisers when ‘disinterested’ arbitrators or appraisers are bargained for.

Court opinions in many jurisdictions seem to place a lot of emphasis on the word “disinterested” when used in appraisal provisions. If you look up the definition of the term “disinterested,” do you think most parties’ appraisers are “disinterested?” The definition means more than being unbiased. It means “having no desire to know about a particular thing.”2 Would you want someone meeting that definition to be your appraiser? Do you think when parties hire an appraiser—even if they agree to pay them on an hourly or flat fee contract—that they really are truly unbiased—if that is how you define or interpret the term “disinterested”?

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